Chapter 1
When Restraint Is Intelligent

Driving long-term, profitable growth requires you to build capacity and capabilities as if you were an endurance athlete. When you practice Intelligent Restraint, you learn how to push yourself and others to go as far and as fast as you can, but no further.

This concept seems so straightforward when applied to your body, but it’s so easy to ignore it when applied to a business.

Intelligent Restraint doesn’t only mean holding back. Sometimes you have to push yourself and others to go further and faster. Getting the balance right is hard, and not achieving it can have dire consequences.

In this opening chapter, I tell three stories—each of them true—to show a range of company approaches to growth. My guess is that you may recognize yourself or your company in one of these stories.

Unchecked Growth Swallows Krispy Kreme’s Potential

Growing up in Knoxville, Tennessee, I liked nothing better than when my family bought a big box of mixed Krispy Kreme donuts and then argued over who got what. As far as donuts go, Krispy Kreme had then—and still has—a great product.

As a growth business, it’s another story.

Founded in North Carolina in 1937, the family-owned Krispy Kreme donut chain had grown steadily, establishing itself as a stalwart feature of suburban shopping malls across the American Southeast. In the mid-1990s, company management embarked on a rapid nationwide expansion drive that included opening new stores in high-profile locations like Manhattan and Las Vegas.

As new outlets sprang up, customers lined up before dawn to buy donuts fresh out of the fryer, a trend the stores encouraged with “HOT NOW” neon signs that lit up when new batches were ready for sale. Dazzled by its new wave of success, Krispy Kreme launched an aggressive franchising effort, opening outlets as fast as it could. Gas stations, shopping malls, kiosks—basically anywhere that could sell a donut—became fair game.⁶

In April 2000, Krispy Kreme went public. On the first day of trading, investors looking to desert the faltering dot-com bubble piled in and the KKD stock soared 76 percent. Krispy Kreme then experienced huge pressure to sustain expansion quarter after quarter, and growth quickly became the company’s only story. And it seemed to be delivering. By mid-2003, Krispy Kreme stock was trading near $50, up 235 percent from its IPO price. Fortune magazine labeled the donut maker “the hottest brand in the land.”⁷

However, far from Wall Street, on Main Streets everywhere, the brand was suffering. The strategy of selling donuts anywhere and everywhere diluted the appeal of its core product. Piles of day-old donuts in grocery stores and gas stations meant Krispy Kreme became ubiquitous, diluting the “freshly made” appeal and neglecting the donut-making theater that had been part of the brand’s novelty and mystique.

At the same time, Krispy Kreme’s uncontrolled focus on growth for growth’s sake meant the market became rapidly oversaturated as new franchises were opened, often just a few blocks from each other. Although that distribution model enabled the firm to report continued growth, it undermined the franchising system by putting outlets in competition with each other. Adding to pressure on struggling franchisees, the firm required all outlets to buy supplies only from HQ at steeply marked-up prices.⁸

The cracks in the sugary glaze began to appear in mid-2004. Announcing its first-ever missed quarter and first loss as a public company, Krispy Kreme’s CEO assigned blame to the growing fad for the low-carb Atkins Diet, an explanation that raised eyebrows among investors.⁹ Meanwhile, accusations grew from franchisees that headquarters was shipping stores up to twice their regular inventory in the final weeks of a quarter so the firm as a whole could bolster its reported profits. Several took legal action.

In early 2005, Krispy Kreme announced it was restating its earnings for the previous year and replacing its CEO with turnaround specialist Stephen Cooper. By April the firm warned of another quarterly loss. Moreover, it advised investors not to rely on published financial reports for fiscal years 2001, 2002, 2003, and the first three quarters of 2004, raising questions over its financial performance since it went public.¹⁰

By summer 2005, Krispy Kreme’s stock had nose-dived to around $6. In an effort to avoid bankruptcy, Cooper announced a turnaround plan, shuttering more than 70 of its donut-making stores (about one-fifth of the total) and refocusing its growth efforts on international expansion.¹¹

Krispy Kreme is a case study in how a traditional company can stumble by going faster and further than its capacity and capabilities can support. Krispy Kreme wanted growth and worked hard for it. But its leaders failed to apply the right restraint when it was needed, which led to a wasteful, poorly managed growth boom that was followed by an inevitable splat, a cycle of growth that wastes human and organizational energy. In short:

It was far too aggressive in expanding franchises and thus diluted its brand.

It lacked real insight into how much of its product could be sold within specific geographies and overestimated demand for the product.

It lacked disciplines to take out cost from its system as it grew so that its partners also could be profitable.

Addicted to rapid growth, it started to play games with product shipments to get its numbers.

And finally, in its eagerness to show growth, the company lost the trust of investors and partners when it was forced to restate its earnings.

Krispy Kreme didn’t fail completely; a new management team turned the firm around by refocusing on international growth and broadening its product offerings. In mid-2016 it was announced that the company would be delisted after it was purchased by JAB Holdings, the investment company owned by Germany’s billionaire Reimann family, for $1.35 billion.¹²

Krispy Kreme’s story shows what can happen when companies fail to restrain themselves. However, companies can also be too restrained. Dell’s experience shows what can happen when a great company is too restrained by what it does well.

Being too Direct Keeps Dell from Wooing Customers

Dell Computer Corporation was founded by Michael Dell in 1984 out of his college dorm at the University of Texas, Austin. From these very early days, when having a computer at work, let alone at home, was a rarity, the firm was built around the direct-to-customer model. Customers ordered a computer, had it built to a desired spec, and then got it shipped to their office or home in a few days.

The model was radical at the time and helped Dell grow rapidly when other PC makers were burdened with much more complex supply and distribution chains. Because it had no inventory and low R&D costs, the fast-growing Dell was able to tailor-make computers for customers at unbeatable prices.

It was a great model for the early days of the mass computer ownership era; in fact, it helped create that era. And for Dell it proved hugely successful. In 2005 the company was valued at $100 billion—more than Apple and HP combined.¹³ (In early 2016 Apple was valued at $605 billion. How times have changed!)

As the market matured and shifted in the years after 2005, prices of PCs declined across the board. Dell’s competitors began to outsource their manufacturing, building in such large volumes that they were increasingly beating Dell on price. At the same time, competitors became better at segmenting markets and targeting their products to the needs of customers, whether they were gamers, big corporations, or anything in between. And many had another advantage: retail space, which made it easier to introduce new products because customers could try before buying.

In response, Dell stuck resolutely with its direct sales model. After all, this model had made it successful in the past and Michael Dell was convinced that sticking to the model would help the company navigate a changing marketplace.

Dell started to lose market share and as earnings fell, so did its stock value. By late 2005, Dell shares had plunged 28 percent in less than six months as earnings also fell by a third and the company was forced to slash earlier forecasts.¹⁴

Michael Dell’s solution was to go back to the model that made the company successful. It tried to sell premium products at a reasonable price. However, for many consumers, although Dell might have been the practical choice, it was also boring. Rivals like Apple, HP, and Acer moved to a model of offering a broader range of innovative new devices that they could sell at a premium. Dell still tried to compete by selling a high-volume, low-margin PC, but since it no longer had a significant cost advantage, the model didn’t work very well.

Although Dell had excelled in supply chain innovation, this competency didn’t transfer into other successful innovations. As the market shifted away from enterprise sales and into consumer electronics, Dell tried to innovate to keep up with Apple. It created the Digital Jukebox and DJ Jitty to compete with the iPod, the Adamo to compete with the MacBook Air and iPad, and the Aero, Streak, and Venue to compete in the smartphone business. All of these efforts were poor responses to the market—too little, too late. Ironically, three years before the iPad was launched, managers in the company had advocated building a tablet PC to compete in the Japanese market. More importantly, they saw the growth of tablet sales in Japan as a leading indicator that tablets would catch on in other markets. Unfortunately, the company chose not to invest because the tablet market was not large. Instead, it wanted to focus on products where it could leverage its supply chain expertise. Had it invested in tablets earlier, it may have better been able to address the challenges of the iPad.

Dell also launched a series of marketing strategies, even dabbling in retail spots. None made an impact. Eventually Michael Dell fired his CEO and took back control of the firm.¹⁵ After a series of unimpressive quarterly reports, he realized—belatedly—that the company had become too constrained by its direct-to-customer model. The secret of Dell’s success had now become a burden.

In an effort to shift away from the low-margin PC business, Dell in 2009 completed its biggest acquisition ever, paying $3.9 billion for tech services provider Perot Systems. ¹⁶ At the same time, Dell brought in a new leadership team, including leaders from GE, Motorola, and IBM. The idea was to transform the business, introduce more consumer electronics, sell through new channels like Walmart, and cut costs.

Again, it was too little, too late. Although it hired the new leaders to reinvigorate the company, almost all left over the course of two to four years.

While Dell computers remain a feature of many offices around the world, the company has struggled to keep pace or find a place for itself as the fast-moving tech industry moved from the PC to the Internet. It also has struggled to compete with cheaper Asian manufacturers. In other words, it has simply run the wrong race.

In 2016, Dell sold Perot Systems and bought data-storage company EMC.¹⁷ The future will tell if having a storage component can help it compete globally with its competitors that have dramatically changed.

The lessons from the Dell story follow an all-too-common pattern:

The firm had built a business model that was, for a while, fantastically successful. But, as the market shifted, the model restrained growth and became a damaging burden.

While other companies (IBM, HP, Apple) were transforming themselves into companies that went well beyond PCs, Dell stayed with a model that hobbled its growth until it was too late to change.

Leaders in Dell excelled at execution but failed to lead in innovation as well as its competitors; the focus on the Dell direct model overly constrained its innovation.¹⁸

The company tried to catch up quickly with its competitors without having built a base of capability in retailing or innovation.

Dell valued looking inward more that outward; it lacked outside-in routines to focus the business externally.

Dell needed to change its business model and did not for many years. By 2016, it had gone private and was trying to reinvent itself. It may succeed if it can release the constraints that have held it back in the past.

Pizza Hut also was restrained by its business model, but a new CEO and a new focus both reduced and increased restraints to unleash growth.

Growing the Pie, Slice by Slice

In 1996, David Novak took over as CEO for Pizza Hut, the world’s largest pizza restaurant chain.

Prior to Novak’s appointment, Pizza Hut’s vision for growth centered on launching big, new, innovative products with a goal to drive revenue. It opened new restaurants and delivery outlets and launched new initiatives, including new restaurant concepts as well as a host of programs to improve staff morale, customer satisfaction, and products. But all these efforts weren’t delivering results.

At the same time, it was losing market share to Papa John’s, a younger upstart with a snappy slogan that seemed to be resonating with customers: “Better Ingredients. Better Pizza.” Papa John’s steady advance was matched by Pizza Hut’s own decline. In an effort to fight back, Pizza Hut had responded with an arsenal of new products: the Triple Deckeroni Pizza, which offered 90 pieces of pepperoni and a six-cheese blend; the Bigfoot, boasting two square feet of pizza; and the Fiesta Taco Pizza, promising a bean sauce and chopped-lettuce toppings.¹⁹ None of them halted Papa John’s advance.

Novak, who moved to Pizza Hut after spearheading a successful two-year turnaround at PepsiCo’s fried chicken chain KFC, examined the Pizza Hut business and summarized what he learned in a single chart. It showed how declining in-store sales had been masked by growth in new stores and the revenue bumps that took place each time the chain launched an exciting new product.

Novak found that while new products generated tremendous initial revenues, overall sales actually declined into negative territory after the initial bump. A major product launch brought in new customers and more orders from existing customers. This additional volume put strain on the system, causing delivery times to become longer, product quality to decrease, and customer satisfaction to dwindle. Disenfranchised customers stopped ordering and sometimes walked away from Pizza Hut altogether. While the chain’s drive for new stores and new products did help it access new customers, these new diners had no loyalty and no patience for the mistakes that characterized the stressed delivery system.

The company had achieved growth as if it were sprinting. This frenzied pace and high number of new product initiatives led the business into a boom-splat cycle of growth to which it had become addicted. In other words, Pizza Hut had run as fast as it could in the short term but was losing the long race. It was not creating enduring growth.

To turn the company around, Novak began by meeting with field operators and asking them what the firm needed to do to move in the right direction. Marrying that feedback with customer data, Novak and his COO, Allwyn Lewis, built a two- to three-year plan to improve operations in Pizza Hut’s restaurants. They then reorganized the company to get it done.²⁰ Novak’s philosophy is that leaders make enduring growth happen only by getting people aligned with the firm’s strategy, organizing the firm’s structure around it, and getting staff enthusiastic about the mission. With the plan in hand, he focused on building the right culture, motivating and empowering staff to take pride in their jobs and exhibit the teamwork that leads to happy customers.

Although a critical starting point was deliberately decreasing the number of initiatives in the company, Novak’s plan did include new initiatives. Importantly, they were all focused on improving operational excellence and were integrated and sequenced to support this singular goal.

Novak and Lewis understood that to regain and sustain profitable growth, the stores needed to be ready for growth. The key to sustainable growth in fast food, he told colleagues, was to win on quality and customer experience. The food had to be good and the place had to deliver a fun experience. This meant employees needed to master the basics of execution and be given the time to learn about new products and services.

In April 1997, Novak used the platform of a retired aircraft carrier, the USS Intrepid, to make the announcement that Pizza Hut was “declaring war on low-quality, skimpy pizzas.”²¹ The new program included:

Introducing fresh vegetables, rather than canned or frozen, to the production line

Empowering employees to make pizzas look good (instead of just measuring each ingredient)

Installing new or improved pizza ovens

In-depth staff training to get the basics of operations right

Extensive practice before the launch of new products

Putting his face to Pizza Hut’s “war,” Novak appeared in TV commercials promoting the new pizzas. And he stated that any customer who didn’t agree that the new pizzas tasted better would be able to get a refund.²²

A month after Novak’s declaration of the pizza war, PepsiCo spun off its restaurant brands, including Pizza Hut, KFC, and Taco Bell, as Yum! Brands. Novak, promoted to CEO of the new entity, set about transforming the frontline of the Pizza Hut business.

Novak’s turnaround of Pizza Hut drove both improved execution of the core business as well as an improved capacity for growth. The chain delivered sustainable same-store sales vs. the boom-splat performance cycles they had become accustomed to. Staff turnover within the restaurants was cut in half, profits were renewed, and the long-term commitment of the Pizza Hut franchisees was built. Today Pizza Hut enjoys the highest average unit volumes and profit per store in the industry.

Novak served as Yum!’s CEO for 17 years, transforming the company’s performance to one of enduring growth. By 2016, Yum! Brands had doubled in size to more than 41,000 restaurants spread across 125 countries and had seen an increase in market capitalization from $4 billion to nearly $32 billion. It was also able to scale the business internationally to the point that it attained 70 percent of its profits from outside the United States compared to 20 percent when Novak took over.²³

The Pizza Hut story describes what it looks like when a leader practices Intelligent Restraint:

David Novak and his leadership team shared a vision for growth, but more importantly they focused the business by increasing some restraints (e.g., fewer big ideas, stronger execution) and reducing other restraints (e.g., allowing team members to make a visually appealing pizza without a measuring cup; giving more coaching to restaurant leaders).

Novak understood that he could not drive long-term profitable growth in a business that lacked the capabilities and capacity to achieve and sustain it. He aligned all the elements to deliver these new capabilities and capacity.

Novak relentlessly drove focus and aligned others to as well. In doing so, he conserved time and energy that was then spent building capacity for growth.

The focus Novak brought to Pizza Hut led to new routines being put in place to bring in an external perspective and to innovate in areas important to its customers.

Within the restaurants, development on the job was made available to everyone. Employees were given the resources and support needed to succeed.

Summing Up: Getting the Right Balance

These three stories remind us of Goldilocks and her porridge: one is too little, one is too much, and one is just right. Krispy Kreme’s lack of restraint in its growth strategy pushed its system beyond its capacity to deliver profitable growth and shaped a culture that allowed leaders to make poor decisions. Dell tried to change its strategy, but its entrenched culture and existing capabilities restrained it too much. Pizza Hut under Novak found the “just right” balance by building operational capability and capacity to sustain growth at the same time it delivered performance.

Restraint and growth go hand in hand. Leaders who deliver enduring growth push themselves and their organizations as far and as fast as they can, but no further. They find ways to perform in the short term while transforming for tomorrow’s growth. Like an endurance athlete, they build critical capabilities and pace themselves to conserve energy and prevent injury. Most importantly, they build up capacity within their system to sustain growth.

Ask Yourself . . .

1. Which of the companies in the three case studies is most/least similar to your own?

2. What are the implications of these similarities and differences?

3. What kind of leadership behaviors do you see in your own business that shape how much or how little restraint is shown?

4. How might your business (or team) benefit by better utilizing Intelligent Restraint? What would be the benefits to the business (or team) and to those who are part of it?